Archive for June, 2006
June 30th, 2006
Michael Lamoureux
I liked the recent article on SupplyManagement.com entitled What’s the Big deal? that quoted Professor John Bessant who stated “Purchasing has an essential role to play in triggering innovation” because that’s precisely what I believe. After all, I did start the blog Sourcing Innovation and the companion resource site SourcingInnovation.com.
Today, the companies that make the giant leaps forward and stay ahead of the game are those that are continually innovating. Furthermore, as the global marketplace gets more competitive, I believe that the only way most companies will survive is through innovation. But innovation doesn’t always come naturally. Fortunately there are methodologies that one can use to increase the odds.
This article in particular overviews a number of basic approaches that Professor Bessant believes in which include “doing what you do, but better“, “discontinuous innovation“, and “thinking caps“.
The first approach, “doing what you do, but better“, involves using established relationships more effectively. Your suppliers should be innovating with you and become an extension of what you do. The article notes that even businesses with billion-pound research spend (or approximately 1.25 billion US at recent exchange rates), such as P&G, now source half their innovation from outside. The reality is that you only have a limited number of people, a fixed amount of resources, and an ever-shortening window of time to get a product out or miss the window of opportunity. As a former techie, I can tell you that some of the greatest product ideas come from the minds of technology users, not developers. Left to their own devices, many developers will work on products that are technically challenging or “cool”, but not that useful. But the developers that listen to people on the outside who say “if only I had a tool that would help me …” create the greatest products.
The second approach, “discontinuous innovation“, where you brave the unknown, think the unthinkable, and explore the frontier where you might lose some of your glorious history and do something completely different, involves spending time making different connections and building relationships with different people outside your core strengths. The harsh reality is that every so often “something pulls the carpet out from underneath everybody’s feet - all the bets are off and it’s a new game“. Maybe it’s a radical new technology, maybe a new market just emerged, or maybe oil shot up in price again. The companies that survive this turmoil are those ready to make the leap and exist at the new frontier. We can again look to the technology sector for examples. IBM, once one of the biggest producers of computer hardware, now makes 50% more on its services then its hardware. (In fact, its services were 47% of revenue in 2005.)
The third approach, “thinking caps“, involves bringing together a dedicated interdisciplinary team to explore different methodologies for “doing what you do, but better” and “discontinuous innovation” while maintaining a balanced outlook. The challenge is to find partnerships that come with relationships that work for you. This is where Professor Bessant sees a role for purchasing managers as this should be part of their fundamental skill set. I agree, regardless of whether your preferred term is “purchasing manager” or “sourcing professional”.
However, these are not the only approaches that exist for innovation. Over the summer, in a collection of 3-part series, I will be exploring different generic methodologies that you can use for jumpstarting the innovation process. I will also outline the role that I see for Sourcing - the next generation of Purchasing - in the brave new global marketplace that we are entering even as you read this. Stay tuned.
For more ideas on how to innovate your purchasing - and your sourcing - see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 29th, 2006
David Bush - Iasta
Debbie Wilson posted a blog on Cool Tools about 2006 being the “Year of the Blog”. In it she poses the question of why do people blog about this space and tries to answer it as well. Jason Busch and Doug Hudgeon have made stabs at this topic as well in the past, which can be found here and here. Although not original, I thought I might throw my motivations into the ring as well, since ESF was the first vendor based blog in spend management.
As this blog is not about the war in Iraq/terrorism or a beanie baby collection or IU basketball, it is obviously being produced for reasons other than a hobby. This led me to think, because the idea, creation and execution is not something that happened one night over beers, but rather, over time with extensive (albeit fragmented) thought.
My reasons:
- Clients: Iasta has a very large and growing group of software users, most of whom are new to e-Sourcing. This blog is an excellent way for us to communicate best practices and spread good ideas from others that could benefit the user community. Originally, I thought ESF might act like a forum with long threads of Q&A but the audience is shy, for the most part, so I do my best just to give good advice. First and foremost, this blog is a small part of the overall customer satisfaction and support platform.
- Passion: I helped create and partially own this company. Everything (non-family) I do is related to Iasta in some way and I now have 7 years of my life invested to see this succeed. A business is much like a baby, over time you see it change and grow up, and as an owner you have a tremendous amount of influence on the outcome. This is one project of many that I feel will ultimately help Iasta in the long run. I can already say, that there is no question this has been the case.
- Marketing: I think it should be pretty obvious that Iasta does not have the same marketing budget as other companies like SAP or Ariba. ESF has proven to be a good way for us to get our name out and stay fresh in the minds of people who watch the industry and might evaluate solutions like ours in the future. Thought leadership is an over-used and under-delivered term but it accurately describes what we are trying to accomplish. Just think, if we provide this much advice, dialogue and information for free, think about how much value our paying clients receive.
- Spite: Remember when George Constanza proclaimed that just for spite he would not break up with a girl because she thought he was going to? Well, two years ago we lost an evaluation at a very large energy/pipeline company. At the time we made the “final 3” in the selection process primarily because the team liked our software capabilities better than other vendors. We later learned that we were eliminated because they incorrectly believed that Iasta could not support them. As it turns out, another vendor in the space was billing Iasta as “4 guys in a garage” - to discredit our ability. Uhhh…not quite. Iasta works with some of the biggest companies in the world with people on location all over the globe and support services that are unmatched by any other vendor. Of course, it took a couple low blows to steel my resolve and to create a campaign to aggressively counter the perceived disadvantage of being small company with no support service (as some were lead to believe). ESF provides a nice forum to explain our position on strategic sourcing and not hide in the shadows. We are front and center in this industry and can work with any company, of any size, at any location. So, like George, I spite my enemies and their web of misinformation!
- Collaboration: This has been retroactive as I did not anticipate the power of networking from a blog. I have met a large number of influential people which only helps to enhance the growth of Iasta of time. As I learn great new ideas from people like Dave Stephens or Eric Strovink, it ultimately helps everyone else I know.
- Ego: Lastly, I have to admit, it is pretty cool to speak and know that people are listening. I have had countless people come up to me at industry functions and introduce themselves and tell me that they read ESF and enjoy it. It is nice to get validation that the hours you spend working are actually appreciated, I think this is a universal trait. Judging from the >20% increase in monthly traffic, I believe we are putting out content that people are valuing by spending valuable time to read.
By the way, if you were wondering, I do not own any Beanie Babies and I could write a blog on IU basketball but would need 4 hours a day to magically appear on my watch. Some one needs to work on that invention…
Entry Filed under: General, e-Sourcing Marketplace
June 28th, 2006
David Bush - Iasta
I’ll admit that I’m a little behind on some of my readings, but I will say that after reading the recent article “Final Thoughts: Ethics and Procurement” from the Apr/May issues of Supply and Demand Chain Executive, I thought it was time for another (short) post on ethics. Although this isn’t Iasta’s first post, see “Online Reverse Auctions and the Ethics surrounding them” Part I and Part II by Agatha Degasperi.
According to the article, “as you are reading this, someone in your corporation is treading the ethical line because of expediency, undue pressure or just because they don’t know better” and that “it’s easy to make the ‘right call’ when the facts are clear and the choices are unambiguous” but that in reality “many situations are clouded with uncertainty, incomplete information, multiple points of view, contradictory responsibilities and pressure”.
It then goes on to say that “ethics are not bottom-up in the enterprise. They are determined by the actions from the top leadership on down. If bending the rules results in accolades because of increased short-term revenue or other perceived benefit, many in the business will rightly believe that ethics don’t matter, performance does — that is, of course, until the story appears on the front page of the paper, which is when the organizational navel-gazing commences.”
And, furthermore that “procurement is a hotbed of ethical challenges because the decisions and choices made in procurement affect the entire corporation.”
What it all comes down to is that a procurement team should have strong ethical leadership, starting at the CPO, to insure that it never waivers in its mission to be the most ethical part of the organization. Furthermore, a procurement team needs to have processes in place that ensure fair and objective decisions are made with respect to every buy. It needs to protect itself from rogue spending, reciprocal awards, conflicts of interest, and pressure from on-high to extract short term savings. It needs to follow best practices of full disclosure before, during, and after every major award, and force its suppliers to do the same. It needs to be the model organization.
Entry Filed under: General, Reverse Auctions, Suppliers, Supply Management Best Practices
June 27th, 2006
David Bush - Iasta
There was a nice article in European Leaders in Procurement this month which was written by Alex Hartley, Group Procurement Manager at Sea Containers.
In it, he references the steps taken by Sea Containers to make a successful jump into e-Sourcing. Although starting slowly (6 reverse auctions in Year 1), they built momentum and adoption which is a much stronger strategy then blasting out 25 auctions too fast. Ruining just one of those events with inaccurate information will leave an indelible mark on the project that will last for years — its called “tribal knowledge” and the natives will not forget for a very long time.
Among the reasons he felt they had success with the program included:
- On-demand tool was used which allowed for easy roll-out and usage with verifiable return within 3 months, rather than waiting for a full software implementation.
- Executive support was given and encouragement from senior management helped spread the word and increase usage of the tool.
- In house expertise was supplemented by usage of a 3rd party vendor for category suitability, process organization, supplier outreach and event management.
The last issue is a very important one, but for different reasons than the article mentions. These skills are very important and critical to success. However, Sea Containers was forced to go outside the solution that SAP provided because the necessary support was not available. Many e-Sourcing best of breed vendors will provide this type of service as part of the overall deliverable and it might be included or a marginal cost increase.
Regardless, there are good concepts to be gleaned from this article and a good e-Sourcing vendor should be able to accomplish all the needs of the users for solid usage and growth with an effective roll-out plan.
Entry Filed under: General, Reverse Auctions, Supply Management Best Practices, Technology, e-Sourcing Marketplace
June 26th, 2006
David Bush - Iasta
E-Sourcing Forum is pleased to bring you commentary from Aberdeen Group’s new Vice President and Research Director of Global Supply Management, Sudy Bharadwaj. Before joining Aberdeen, Sudy brought with him extensive industry experience in the strategic sourcing and supply management space from his experience at MindFlow Technologies, i2 Technologies, and Hewlett-Packard. Sudy can be reached at sudy.bharadwaj@ aberdeen.com.
My personal take in on-demand
First and foremost, we need to realize that a business decision should be made before an “on-demand” vs. “license” vs. “asp” vs. “…”. The business pressures must be realized and understood by the different stakeholders in the organization. The business pressures are not “disparate” IT systems; these are executive-level issues that affect the income statement and the balance sheet and the CFO understands these pressures. Once we have the actions, capabilities and enablers to effectively manage these business pains, meeting the objectives of the enterprise, we can then determine how to deploy the overall solution to the problem – business process, change management, and finally, a technology enabler. This is where an On-Demand solution comes in: the technology challenges which exist with license solutions are reduced in an On-Demand solution. New challenges do come up, but for certain business-processes; the benefits of On-Demand far outweigh these new challenges.
What I saw when I was in the industry
The supply-management space has great potential for taking On-Demand as a discipline to the next level; much like CRM brought it the initial attention. Let’s look at a specific area such as strategic sourcing. An enterprise can apply a strategic sourcing On-Demand solution to a specific category (such as packaging). This is a good way for the enterprise to determine if the solution and solution provider can achieve the objectives of the category. The providers do need to be careful, some enterprises will take advantage of a category sourcing event, but never have the intention to utilize the solution. This is simply a drain on the vendor’s resources; so vendors must be more careful about the opportunities they pursue. What is the right business model for the vendor, which corresponds to the right business proposition for the enterprise is always a challenge and all parties need to review this carefully.
Where is it going?
This model is not a passing fad – it is here to stay. Some On-Demand providers are offering innovation by focusing on very complex problems, requiring sophisticated algorithms and large amounts of computing horsepower. The value-proposition to the enterprise is solving the complex problem without the IT investment required to apply the computing horsepower. Other companies are offering the model as a very low-cost alternative to license and, thus, offering supply-management capabilities to enterprises that may not have had the budget for a license solution. This will provide supply management capabilities to the masses. This can be a similar evolution the PC provided – offering compute capabilities on the desktop.
An innovative capability includes community benefits similar to Web 2.0 concepts like myspace.com. In the supply-management space, members can join a provider’s community and execute business activities (sourcing events, E-procurement). As the members execute these activities, the provider can gather certain non-confidential statistics and provide benchmarking data for the entire community. Some early community metrics I have seen are rudimentary and do not expose confidential information.
Aberdeen will be releasing a study – On Demand Supply Management. We found the top areas for deploying supply management solutions On Demand are: contract management, sourcing, supplier enablement, and spend analysis. We also found a delta on the amount of realized value between license and On-Demand deployments. The study will be available June 30.
Entry Filed under: Analysts/Research, General, Technology, e-Sourcing Marketplace
June 25th, 2006
Michael Lamoureux
On Demand is here to stay. Oracle CEO Larry Ellison recently said that he expects the on-demand business model to be an increasingly influential one and he personally owns large stakes in a number of on-demand companies that have been making headlines. Even Microsoft CEO Steve Ballmer has called on-demand software the most important trend in the software market over the next two or three years.
On-Demand software allows Supply Chain Management (SCM) to spur creativity and business innovation by freeing them from mundane administrative tasks. After all, the future of software will not only be about how software is supported and delivered, but about how it can make critical information more accessible and usable for tomorrow’s knowledge workers.
On-demand is the natural evolution of software. Some people are calling it a revolution and saying the best is yet to come. For example, Jason Busch, founding partner of Azul Partners and blogger extraordinaire of Spend Matters recently stated that he predicted the next generation of on-demand software will:
- incorporate external content and insight as a fundamental part of its
value proposition,
- leverage community and shared instances for the benefit of all participants, and
- transform internal spend management service delivery models.
To a large part, I believe this to be true, though in reality the implementation and usage will likely be slightly different then what Jason is predicting.
However, one of the things that the evangelists, and there are many, are overlooking is that one of the key benefits of future software-as-a-service offerings is the forthcoming transformation to software-with-a-service. With software-with-a-service, offerings will be inherently customizable and provide instant integration (or touch) points to related on-demand services and value added offerings.
Furthermore, there’s this new evolution of rule-based programming called business process management (BPM) which has led to the development of workflow and process-focused development languages such as java Business Process Management (jBPM) and Business Process Execution Language (BPEL) which allow for the development of a new generation of workflow driven applications. These new workflow applications can be customized on-the-fly to incorporate modified processes and workflows that not only allow for the construction of more versatile and configurable applications then before, but also allow trained business users to define their own workflows through a visual environment. Furthermore, since these technologies are being built hand-in-hand with web-services, it should be obvious that on-demand offerings are going to be the first to incorporate these new capabilities.
The future of on demand is coming, and it’s going to be awesome!
For more information on software-as-a-service and on-demand, see the
On-Demand / Software as a Service Application Platforms wiki-paper on the eSourcing Wiki.
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 24th, 2006
Michael Lamoureux
Yesterday we discussed the considerable benefits of on-demand software which delivers functionality over the Internet from an application instance that may be shared across many clients, the increasing adoption rates, and the overwhelming benefits that were discovered by Aberdeen Research in a study released earlier this year. We also pointed out that there still remain some naysayers with a much darker view of the model who have done nothing but offer up a myriad of critiques. (I should note that many of these naysayers are also sellers of traditional enterprise software packages who get huge commissions with every sale and have every reason not to like a new model that slashes prices which used to fatten their bank accounts.)
However, since I would personally question any promoter of on-demand software who fails to address each and every potential concern brought forward, here is the long list of concerns that I have found and the associated truths that should set your mind at ease.
( 1) Your Data is Not Secure (especially in a multi-tenant model)
I think PepsiCo’s CTO said it best: “Our data is probably safer behind [the provider’s] firewall than behind our own”. IT is your provider’s business, and the security of their data and yours is their utmost concern. Not only will they have developers on staff with security expertise, but many work with leading security firms who will conduct regular audits and monitor your provider’s domain(s) for external assaults, stopping them before they even get to the firewall.
( 2) You cannot guarantee reliability
Aberdeen’s recent study found that even in areas such as system uptime and application response time, more enterprises reported that these solutions out-performed traditional enterprise applications run by their internal IT department or a third party ASP. Remember, your uptime is your on-demand provider’s business. Since you can leave if you’re not happy, they tend to be much more responsive then your IT department whose jobs are a lot less dependent on the up-time of any single application.
( 3) You cannot manage your own data
It is true that you have less control over how it is distributed across the database instances, but it is also true that you do not want this control. Unless you are a database expert, you will not know how best to partition your data for maximum performance. Furthermore, as we discussed yesterday, chances are your provider is much better at backing up your data for quick recovery than your internal IT department.
( 4) New on-demand offerings lack functionality
Opponents state that many on-demand offerings only have 70% to 80% of the functionality offered by their traditional behind-the-firewall installed applications. I will concede this point, but then remind you that most organizations use less then 50% of the functionality offered by most applications. Therefore, these offerings are still offering you an average of 33% to 50% more functionality then you will actually use, so this is a moot point.
( 5) You have no control in a disaster
True, but this is not something you want. When a disaster happens, you want someone to clean up the mess for you. And more importantly, you want someone who is prepared. For a software-as-a-service provider, application uptime is their core-business, downtime will kill them. If you are a manufacturer, this isn’t nearly as true and chances are your IT department is so swamped that they haven’t even thought about disaster recovery recently while most on-demand vendors will have detailed plans that they will run through and up-date on a regular basis.
( 6) A vendor can afford to be sloppy
Providers of traditional software argue that because on-demand software providers always have immediate access to their software, they can afford to be sloppy and roll out upgrades without a lot of quality testing, adopting the “if something happens, we’ll just fix it later” attitude. In fact, the opposite is true. Since most on-demand providers use a multi-tenant model where all customers are on the same instance, a single bug, no matter how minor, could bring down all of their instances, and customers, simultaneously! In contrast, even a bug in a commonly used feature will generally not affect more then a small number of customers in an enterprise software provider’s user base. Thus, on-demand providers are generally much more diligent and thorough when preparing to roll out upgrades or modifications. After all, if they go down, chances are every customer is going to be calling in within an hour wanting to know what’s going on - and no one wants to be around when that happens.
( 7) Upgrades are forced upon you
I’ll concede this as a truth as well, but would like to know why this is bad? On-demand providers understand that the last thing their customers want is the rug to be pulled out from underneath their feet and take great pains to minimize the impact on what’s already there when planning an upgrade. Often the net effect is that if you do not look for it or read the upgrade announcement, you might not even know a new feature is there. I like to compare the free upgrades to your cable company deciding to offer you more channels for free (even though I know this would never happen in reality, or at least not with my cable company). You wouldn’t be forced to watch them, but if you wanted to, you could. What would be wrong with that? Compare this to traditional enterprise software providers who think nothing of rearranging the entire interface between releases and forcing you to relearn the entire product, just because they thought the new interface was better. (Something even Microsoft is guilty of. Last time I upgraded Word, half of the few features I actually used weren’t where they used to be.)
( 8 ) Because they have your data, they lock you in
In these situations, I think the author is confusing old-school ASP with new-wave on-demand. Any true on-demand application is going to come with good data import and export utilities. Furthermore, you can verify up front that you can export your complete database at any time and most vendors will even allow you to build export support upon termination into the contract. (They might charge a small service fee for their representative’s time, but nothing compared to what your application integrator would probably charge.)
( 9) You lose the ability to customize the application any way you like
This is partially true, but again, this is not a bad thing. Name something you rely on everyday whose inner workings you do not fundamentally understand that you would honestly risk attempting a major customization on. If you were not a professional mechanic, would you risk rearranging the internals of your engine? If you were not a certified electrician, would you risk re-wiring your primary panel? Software is just as complicated, and extensive customization is best left to those that understand the inner workings.
Furthermore, nothing prevents a multi-tenant on-demand instance from being downgraded to a single-tenant instance on its own (set of) server(s), at which point, you or the on-demand provider can customize it to the nth degree. Most providers will happily give you a single-tenant instance if you do not mind covering the extra costs (which are probably still substantially less then traditional ASP rates), and many will do customized development if you are willing to cover the costs. Some will even sell you a license to customize and deploy the instance behind your own firewall if you so choose, but then you lose some of the on-demand advantages, and the advantage of having someone else administer and maintain the application in particular.
Finally, many on-demand solutions are built from the ground up to support a basic amount of customization capability on the UI and workflow so that the application can be configured to each customer.
(10) You risk losing everything if the provider goes belly up
This is probably the only real viable concern I’ve ever heard, but this risk is not unique to on-demand software. This inherent risk is always present when using a third party for any service, and you always deal with it in the same way - you have a back-up plan.
If your data is important, make sure you know how to do a full export and have someone do it on a regular basis. If your data base is very large, contract with the on-demand provider to do a full-export to tape on a regular basis for you and have that provider either send the tape to you or to a 3rd party storage facility.
If the software is important, look for a provider with an escrow agreement where their customer’s get a license to the source code and installation manuals should they ever go out of business. Then you could always have your IT department run the application internally until you found another provider. But if you choose a stable provider who is growing, chances are this is not a big risk.
(11) Where are the SLAs
I really do not know where this concern came from. Most serious on-demand software providers these days offer SLAs, and some to five nines reliability. What more do you want?
(12) Where are the value added services
Most traditional software providers argue that their offerings have more value because they often bundle a slew of value added services, such as consulting time, services, and free access to resource libraries as compared to on-demand offerings which often just offer the software. This is true, but it is also true that traditional offerings cost 5X to 10X as much. Let’s repeat that: 5X to 10X as much! With those profit margins, they can afford to throw in a consultant or two - they’re still making obscene amounts of money.
Therefore, this isn’t a fair question as the comparison is not fair. Traditional services build in a cost for every possible service you might use, even though they know most of their clients will not use most of the services. On-Demand providers charge you a minimal fee based on what you say you will use. Most providers will offer additional value added services that complement their counterparts for a small fee. Furthermore, when you add up the total cost from the on-demand provider for every possible service and compare that to the traditional enterprise price tag, you will still find that on-demand providers are still at least 3X cheaper when you consider what you actually will use.
(13) You don’t have control
As you’ve probably figured out by now, this isn’t true. They control the software, but you still own your data, and, more importantly, you have the leverage. If their service sucks, you can leave. If too many customers leave, they’ll go out of business. You have control, and don’t let anyone fool you into thinking otherwise.
And it’s only going to get better. Stay tuned!
For more information on software-as-a-service and on-demand, see the
On-Demand / Software as a Service Application Platforms wiki-paper on the eSourcing Wiki.
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 23rd, 2006
Michael Lamoureux
On Demand or SaaS (Software-as-a-Service) is the delivery of software functionality over the Internet from an application instance that may be shared across many clients. It is not simply ASP (Application Server Provider) re-invented. With ASP, you bought a license to a traditional piece of software designed to be installed within an enterprise and paid someone else to host and manage it for you. With on-demand, you rent a license to a software module designed for the internet from the ground up and the provider hosts and manages it for you.
On Demand is becoming the new paradigm in software delivery and “the emergence of on-demand software is not an isolated trend; it is a fundamental, market-altering shift in how software is built, bought, delivered and used.” (Bill McBeath, Chief Research Officer @ ChainLink) It’s the frontrunner of the new “utility” computing movement in which technology is provided in the way power or water is delivered to your business, as a service.
A look at the sharp increase in on-demand adoption statistics verifies this trend. A study by IDC (summarized on Forbes) last year determined that almost 33% of respondents were using software on demand and another 48% were considering doing the same. This is a sharp turnaround from a study 18 months prior that determined 70% of companies were not willing to consider on-demand. Furthermore, a study by Aberdeen Research earlier this year focusing on the use of on-demand applications in the supply chain, one of the business functions that was not an early adopter of on-demand, determined that half of the study participants said they now use or are considering using on-demand applications to manage select portions of their supply chains. Finally, Gartner claims that by 2010, 30 percent of new software will be delivered via SaaS as businesses continue to adopt this approach.
Furthermore, on-demand software-as-a-service comes bundled with a slew of benefits not found with traditional software models. Fifteen of these benefits are:
( 1) Pay As You Go
No more spending thousands, tens of thousands, hundreds of thousands, or even millions of dollars up front for a software license only to spend that much again on implementation and training costs. You pay a fixed, relatively small, monthly, quarterly, or yearly fee (often less then the maintenance costs associated with traditional licensed software).
( 2) Instant Deployment
You can start using the software the minute you pay for it and your provider activates your accounts. Most of these offerings come with easy-to-use streamlined data import utilities that allow you to fully set-up your instance in a matter of weeks, or even days, not the months or years associated with traditional enterprise software deployments!
( 3) Single Instance
All you see is a single instance of your software when you log in, regardless of how many instances and boxes are required to support your software behind the scene. No more one instance per unit, department, or division.
( 4) Economies of Scale
The fact that on-demand software is built from the ground up to be a multi-tenancy model allows a provider to share the hardware and software instances required to support your instance across clients and pass on the savings generated by economies of scale to you.
( 5) Provider handles administration, maintenance, and headaches
Software-as-a-service is the ultimate in computing from a utility perspective - and the only hassle-free computing model out there. All of us know how much of a hassle it can be just keeping our windows PCs working on a regular basis - enterprise software can be much more complicated. But neither you nor your IT department need to worry about that, the provider takes care of all the administration, regular maintenance, and associated headaches.
( 6) Free Upgrades
On-demand software is updated automatically by the provider when new features are available. With many providers, this often occurs frequently, and some providers offer significant free upgrades three to four times a year. Compare this to traditional enterprise software where you might get an upgrade once or twice a year if you are lucky, and willing to pay for it.
( 7) You, the customer, have the leverage
Many on-demand offerings are month-to-month (after an initial sign-up period, depending on the provider, which is typically never more than three to six months) and you can leave at any time if you are dissatisfied. A provider’s success is not measured on the income from the initial contract but by adoption, satisfaction, and, most importantly, your renewal. Unlike a traditional installed enterprise software provider who gets all the money up front and disappears, on-demand providers are in it for the long haul. SaaS providers continually strive to make their offering the best it can be.
( 8 ) Anywhere access
Because on-demand is internet-based, you can typically access the full-functionality anywhere you have an internet connection. This is different from traditional web-access to enterprise applications which requires a VPN connection and specialized client software.
( 9) Buy what you need, and only what you need
With the on-demand model, you can buy just what you need and not a bundled package where you may never use more than half the features. Recent studies have suggested that the vast majority of product features go unused by a customer. If you do not believe it, count how many features of Microsoft Word you use on a regular basis. Maybe 20 or 30 if you’re a real pro. Now compare this to the 300+ (or is it 400+?) features that Microsoft Word has. With on-demand, if you do not need it, you do not have to buy it.
(10) Single Accountable Entity
With traditional installed behind-the-firewall enterprise software, if something went wrong the software provider would blame the third party integrator who installed it and the third party integrator would blame your in-house administration team and so-on. With on-demand, there is a single entity involved with and responsible for the software and so a single point of accountability.
(11) Regular, Automated Data Backup
How often does your internal IT department back up your data? And, more importantly, how often do they test the backups in recovery drills? (Warning: If you are faint of heart, do not ask this question if you want a real answer!) As an ex full-time developer/architect, I found it quite shocking how little time most IT departments actually spent on data backup and disaster recovery planning. Moreover, very few stored critical data backups off-site in a secure facility and those who followed the practice generally did not do so nearly often enough. However, an on-demand provider, who knows that up-time is their business, usually has a much deeper understanding of IT-as-a-service then an internal IT department and generally has backup, recovery, and disaster avoidance as part of its daily operating procedures.
(12) Built for Change
Your business never stands still, so why should your software applications? However, that’s what happens when you buy traditional enterprise software - you’re locked into a single operating mode until you upgrade the software, which could be years when you consider the up-front costs you generally have to sink-in to buy the initial license. On-demand applications are built for change, since the providers know that if they do not keep up with the forward pace of the industry, you will have no reason to renew when your initial term is up.
(13) Unparalleled Collaborative Capabilities
Unlike most applications, on-demand applications are built as native web-based applications and, therefore, allow unparalleled collaborative capabilities as compared to traditional enterprise applications.
(14) Integration with office applications
The vast majority of on-demand applications recognize that Microsoft Office is the defacto standard for professionals everywhere and build-in integration capabilities for data import from and data export to these applications, making them easy to use and populate.
(15) Low Total Cost of Ownership (TCO)
On-demand dramatically restructures the economics of developing, delivering, and supporting business software. Triple Tree and the Software and Information Industry Association (SIAA) found that SaaS deployments are 50% to 90% faster with a total cost of ownership (TCO) five to ten times less expensive than traditional software!
On-Demand users report overwhelming benefits when they compare their software-as-a-service offerings to traditional enterprise installations. Aberdeen’s study from earlier this year found that:
- 66% of respondents said on-demand platforms were easier to upgrade
- 64% of respondents said on-demand platforms had better ROI and, furthermore,
- 35% quoted time to ROI as under 6 months, and
- 65% quoted time to ROI as under 1 year
- 57% of respondents said on-demand had a faster implementation time and
furthermore,
- 61% gave an implementation time of under 3 months, and
- 84% gave an implementation time of under 6 months
- an even number of respondents said customer service was better,
with the other half saying customer service was the same
The ultimate impact is that on-demand allows an organization to escape, or bypass, the IT backlog and get a solution, and results, faster while improving the alignment between vendor and customer goals, lowering risks, and decreasing capital expenses. Furthermore, the release from the mundane administrative and maintenance tasks frees you up to focus your efforts on higher-value strategic initiatives.
Of course, still not everybody has such a rosy view of on-demand, so tomorrow we’ll review the myriad of concerns that have been presented and see that not only are most of them unfounded, but that some of them actually reveal additional advantages of the on-demand model!
For more information on software-as-a-service and on-demand, see the
On-Demand / Software as a Service Application Platforms wiki-paper on the eSourcing Wiki.
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 22nd, 2006
Michael Lamoureux
For those of you familiar with the fashion industry, you are probably familiar with Supply Chain poster-child Zara , who, through the use of innovative process and technologies, designed a flexible supply chain that allows the company to take a garment from design through the manufacturing process to store shelves in 10 days - an almost unbelievable turn-around time in an industry that typically takes three or four months to execute the cycle.
One of the technologies Zara uses to accomplish this impressive feat, and stay profitable, is Lead-Time Optimization. Lead Time Optimization, succinctly defined as the optimized selection and management of inbound supply chains with respect to (highly) uncertain demand and long production lead times, attempts to optimize product line profits by attacking and minimizing the key drivers that lead to markdowns, stock outs, inventory turns, and reductions in working capital, all of which have a negative impact on profit. Recognizing that the industry is fraught with uncertain fluctuating demands that cannot be predicted with any significant degree of accuracy in advance, the lead time optimization products try to optimize around demand risk that results from the impact of variable demands on production schedules, capacity, shipping, and associated costs by assigning dollar values to risks, speed, and flexibility.
Lead Time Optimization is the attempt to determine an optimal award configuration which maximizes supply chain speed and flexibility with respect to both the fixed and calculated costs. It works best if you are willing and able to consider innovative supply relationships where you guarantee a minimum overall buy with respect to both supplier capacity utilization and raw materials, since then the suppliers are able to guarantee availability when you need it.
On the other hand, Total Value Management, which David discussed in Supply Management or Spend Management? and Total Value Management, is the pursuit of optimal award decisions with respect to direct, indirect, and impact costs and supply chain risk. A procurement professional employing TVM sourcing techniques is generally interested in the lowest cost buy that will mitigate the identified supply chain risks to minimal acceptable levels.
Furthermore, Decision Optimization is the technology they employ to find the lowest cost solution that meets their risk-mitigation constraints. Generally, the objective function is designed to minimize cost, not risk or supply chain flexibility.
So how could these two technologies possibly be related? Let’s start with Lead Time Optimization. Although its proponents, which include SupplyChainge, one of the pioneers, and Infosys, promote it as a profit optimization technology and proclaim that it represents the highest value obtainable in strategic sourcing as it is based on industry-tailored data models, industry-specific optimization technology, and business process improvement, it is really just advanced cost minimization, where the cost that is being minimized is not the should cost, landed cost, or even total cost of ownership (TCO), but the average potential cost when you consider unexpected costs that could occur due to variances in demand. Furthermore, when you consider that profit is just revenue minus expenses and that there is no way to really maximize revenue when you have no control over how many items are sold and the final prices actually obtained, the only way you can really maximize profit from a procurement point of view is to minimize expenses, which translates into minimizing overall purchasing related costs - no matter what.
However, this “no matter what” is tricky business when you cannot determine in advance precisely how big your buy is going to be and your savings opportunities typically derive from spend leverage. However, you do have a demand range which will generally have increasing probabilities as you approach the center of the range, and based on this you can determine a “book” capacity that is likely to minimize your overall spend in the worst case scenario and yet keep your overall spend low.
For example, let’s assume your range is 20,000 +/- 10,000 with a 90% chance of it being +/- 1,000, 80% chance of it being +/- 2,000 and 10% chance of it being +/- 9,000. Let’s also focus on shipping costs for simplicity and assume that you can ship at most 24,000 units on a truck, that you don’t get the FTL rate unless you ship at least 18,000 units, and that any units that aren’t booked (or will not fit on the truck) have to go air freight. Then we might have the following situation:
Truck Air Rates Probability Cost
10,000 10,000 0 1.5 / 0 0.0001 15,000
12,000 12,000 0 1.5 / 0 0.0200 18,000
14,000 14,000 0 1.5 / 0 0.0400 21,000
16,000 16,000 0 1.5 / 0 0.0600 24,000
18,000 18,000 0 1.0 / 0 0.0800 18,000
20,000 20,000 0 1.0 / 0 0.0900 20,000
22,000 22,000 0 1.0 / 0 0.0800 22,000
24,000 24,000 0 1.0 / 0 0.0600 24,000
26,000 24,000 2,000 1.0 / 2.0 0.0400 28,000
28,000 24,000 4,000 1.0 / 2.0 0.0200 32,000
30,000 24,000 6,000 1.0 / 2.0 0.0001 36,000
So what do you pre-book to minimize costs? Well, pre-booking 18,000 units gives you your lowest cost from a logistics and transportation perspective, but what if you demand turns out to be 27,000? Then you are paying 18,000 for the pre-booked units plus 18,000 for expedited air freight or 36,000 in total! At a simplified level, what lead time optimization would try to do in this situation is determine the booking level that minimizes the overall average logistics cost regardless of actual demand.
At a basic level, it is essentially trying to find the value such that:
Avg (booked demand cost + variable cost) over all possible demands is minimum (while balancing the required supply chain flexibility demands). Note that the variable cost also applies to lower demands if the provider bumps up your rate for not shipping sufficient volume (and wasting capacity). Even without regard to probabilities or flexibility constraints, this is not a simple calculation. To do this by hand, you would have to calculate the cost of each potential demand relative to each booked demand, take an awful lot of averages, and then choose the best price, which might not be obvious. For example, lets look at the key breakpoints of 18,000 and 24,000 and the median, 21,000.
Booked Actual Base Cost Var Cost
18,000 10,000 18,000 4,000
14,000 18,000 2,000
18,000 18,000 0
22,000 18,000 4,000
26,000 18,000 10,000
30,000 18,000 30,000
21,000 10,000 21,000 5,500
14,000 21,000 3,500
18,000 21,000 1,500
22,000 21,000 1,000
26,000 21,000 7,000
30,000 21,000 15,000
24,000 10,000 24,000 14,000
14,000 24,000 10,000
18,000 24,000 6,000
22,000 24,000 2,000
26,000 24,000 4,000
30,000 24,000 12,000
Which is best? Is it the middle value, which is nearest the forecasted demand? Or the higher value, which would keep expensive air freight to the absolute minimum? It’s not an easy answer. It really depends on the skew of your probability distribution and the likelihood of demand significantly spiking, but note that it’s not 18,000, which our original table seemed to indicate. If the likelihood of demand spiking is higher than the likelihood of demand dropping, then a higher value is going to be better as variations will carry the minimal differential cost, and we will have a “safe range” of lower values where we will still get the quoted rate and run minimal losses.
Now lets look closely at Total Value Management, which is the optimization of total cost of ownership relative to supply risk and which constitutes an equal focus on spend management, to control costs and improve operations, and supply management, to mitigate risks and ensure supply. Unlike TCO, which focuses on direct landed costs and indirect usage costs, TVM also focuses on the impact costs of every decision. What’s the cost associated with the risk of dealing with a new supplier? What’s the cost associated with selecting a fixed capacity transportation option? What’s the cost associated with not locking up supply of a critical commodity or capacity from your most strategic supplier? These costs are quantified and considered when you use Total Value Management. The model that decision optimization is applied to contains your direct costs (PPU, Freight, etc.), your indirect costs (processing, waste, etc.), and your impact costs (supply risk, demand risk, etc) as well as your supply (chain) constraints. The generated solution obeys all of your supply chain restrictions, and if these are properly formulated, in addition to being cost effective, it will enforce a flexible supply chains as only suppliers that meet the appropriate criteria will be selected.
This leads me to ask: what’s the difference between Lead Time Optimization and Total Value Management Decision Optimization? Both technologies have essentially the same goals, the same best practices, and ultimately the same effects - controlled costs under risk, which ultimately leads to higher profits, and higher margins.
Entry Filed under: General, Optimization, Technology, e-Sourcing Marketplace
June 21st, 2006
David Bush - Iasta
Ok, so I am as tired of Emeril as everyone else, but I will take this opportunity to lift his billion dollar phrase for my own benefit. BAM! E-Sourcing Forum will be kicking it up a notch this summer!
For starters, I would like to announce that Iasta has re-engaged Dr. Michael Lamoureux to co-lead our continued development of advanced sourcing optimization, known in SmartSource as Decision Optimization, which he has helped us ramp up quickly since he started working with Iasta in February. A PhD mathematician and computer scientist by training, and e-Commerce and e-Sourcing designer by trade, we are very excited to have him on our team as we build out even more sophisticated and proprietary optimization models that can be used in our strategic sourcing application. These software enhancements will further cement Iasta’s theory and application of Total Value Management (TVM) for the strategic sourcing community. Prior to Iasta, Dr. Lamoureux worked with a number of eCommerce and eSourcing companies, the most notable being MindFlow Technologies, one of the pioneers of decision optimization technology for strategic sourcing, where he occupied the role of Chief Architect for over three years.
How does this effect ESF? Not only will Dr. Lamoureux be contributing on a regular basis, but, beginning this weekend, we will begin posting in-depth, original content regarding Purchasing Innovation and Advanced Sourcing Principles. Beginners beware…these posts will not be in the kiddie pool, you should expect to be thrown into the deep end. However, fear not, the lifeguards are on duty and we encourage you to post comments and questions which will be promptly answered. These concepts will be covered in our Weekend Edition of E-Sourcing Forum, so they will not overrun the normal daily content that you have come to expect from us. (And for you ex-techies who have converted to Sourcing, Dr. Lamoureux has started his own blog, SourcingInnovation).
Thanks again to all our regular visitors and rapidly increasing daily visitor count. I think this deep-dive into sourcing will be very well worth the weekend read for those with a thirst for detailed knowledge.
Entry Filed under: Functionality, General, Optimization, Supply Management Best Practices, Technology, e-Sourcing Marketplace
June 20th, 2006
David Bush - Iasta
A recent article on SupplyManagement.com entitled “Message in a Bottle” peaked my interest when the second sentence stated that efficient buying can enhance the consumer’s hospitality experience. It’s a well known fact that efficient buying can enhance your product, your company, and your image … but is not stating that it can enhance your hospitality stretching it a bit thin?
I kept reading and the quote attributed to Graham Donald, marketing and business planning director at drinks distributor Matthew Clark which said “In the past, procurement in hospitality was driven very much by the personality of the purchasing manager. Now there seems to be a more considered and focused approach as procurement managers have a better understanding of their market and how to purchase for it” certainly held my attention.
However, it was the quote from Liam Taylor, commercial director of food service technology provider Makella, in the next paragraph which said “Room occupancy was always the most important thing for hotels but now there is a realization that, as the market becomes more competitive, they need to look at new ways of improving their margins while remaining attractive to customers” that assured me that this article might really be on to something.
Hospitality is a diverse industry - covering everything from contract catering in hospitals and schools, to fast food chains, to five star restaurants, to the hotel you stayed in last night. It ranges from budget offerings through 5-star experiences. It’s very complex.
And it is significantly different then the retail sector, which tends to play it safe. Consumer tastes are becoming more adventurous and the hospitality sector is taking on the challenge, introducing new products to their customers in an effort to differentiate themselves from their competitors and remain attractive. For example, market leaders in the restaurant sector drive sales of specialist foods by offering products that introduce a consumer to a new taste experience or different way of eating.
Moreover, in hospitality the success of a brand is based on people’s experience, not necessarily the raw materials or physical quality. The major difference between hotel chains with the same star-rating is not the towels they provide but the ambience they create.
So how does efficient buying enhance your hospitality? Efficient buying keeps your costs low and your margins high, allowing you to invest in more sourcing expertise, which benefits your customers since you are sourcing products that will enhance their experience, which involves understanding what they want - and the more staff you have devoted to understanding what the customer wants, the better your overall offering will be.
The section on technology was very enlightening too. Even though it said that, on average, hospitality companies do not use eSourcing technologies as much as their retail counterparts, it pointed out that there is an increasing understanding that every business needs to keep their margins as low as possible and that hospitality companies are beginning to realize that eSourcing systems can reduce their overheads and give them an edge in a competitive industry.
Liam Taylor of Makella agrees, noting that “The hospitality market needs to look at new ways of making savings while retaining an attractive product so the use of technology is very important. The market has grown increasingly aware that the key to doing this is by developing an attractive marketing process backed up by efficient procurement methods.”
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 19th, 2006
David Bush - Iasta
I found the recent article “Advocate for a Safe, Secure Supply Chain” in Inside Supply Management to be right on target. One of the key points of the article was that the prevention of any incident that may cause a supply chain disruption is critical in today’s marketplace where brand reputation often spells the difference between success and disaster for many manufacturers. See my recent posts on “Hard Times Make Lean CPG Manufacturers” and “Total Value Management” for some insight on how damaging supply chain disruptions can be.
The article quotes Theo Fletcher of IBM who says that “the implementation of security processes and practices allows the company to reach a level of consistency in all of its import activity and provides a level of predictability that is nearly impossible to attain in today’s marketplace” and that the industry as a whole should drive security programs.
Supply chain security should not be regarded as a cost of doing business but as an opportunity to truly drive efficiency and consistency in import activities. When all supply chain partners are able to import the same way in all countries where they do business, it drives efficiencies for all parties and drives a competitive advantage.
Companies should consider an active role in voluntary government programs such as the US Customs-Trade Partnership Against Terrorism (C-TPAT), Canada’s Partners in Protection Program, and the World Customs Organization (WCO) Framework of Standards to Secure and Facilitate Global Trade. It will help ensure that the supply chain is secure on an end-to-end basis.
The benefits of compliance combined with asset visibility and tracking technologies is that not only can you expect time-definite and controlled chain of custody conveyances across the supply chain, but also higher levels of predictability with the flow of materials, making it much easier to forecast supply and demand imbalances, which you can expect to be minimized through the adherence to secure supply chain policies.
Entry Filed under: General, Global Supply Issues/Risk, Suppliers
June 16th, 2006
David Bush - Iasta
Unfortunately, I missed the timeliness for Dave Stephens new venture, Coupa. For those that read blogs, you know that Dave runs Procurement Central, which is a great source of information. He was kind enough to give me advance warning of his announcement but I was on vacation and could not post last week on it.
I also had a long conversation yesterday with Dave to get more understanding of Coupa and, needless to say, it is very exciting and interesting. I am really looking forward to some one of Dave’s intellect and experience to add more value to software solutions for this industry. Credible and valuable software is a rising tide that lifts all ships. Read Dave’s email and summary below and look for more about this soon.
copy for Iasta-
My New Venture
Today I’m announcing what many of you have been anticipating for some time - my new venture. It’s called “Coupa”, and it’s been operating in stealth mode for a few months now. Our small crew consists entirely of “Top Guns” from the Oracle Advanced Procurement team. It would be fair to say as a group we’ve designed & built quite a few Procurement products over the years. And we’ve come away with some pretty interesting beliefs that we now intend to test in the market.
At Coupa, we believe open source is the future of enterprise software. To that end, we intend to introduce best-in-class Procurement products at absolute rock bottom TCO based entirely on an open source technology stack. Our first product, a new take on eProcurement, will be available this July.
Why eProcurement and how is it different? I’ll delay answering these rather important questions for now. Suffice it to say those we’ve shared it with are saying things like “now why didn’t I think of that?!”
On the technology front, the Coupa team knows all too well today’s enterprise software is overly complicated, heavyweight, and yawn-inspiring. Our open source alternative aims to be the antithesis - lightweight, easy to deploy, and fun.
We expect to offer the software via traditional download and via SaaS. In the end, we believe you should retain choice on how you deploy your software.
Via open source, we will look to our partners and customers to help shape our products. We look forward to seeding the Coupa open source project & to growing an open source community around the Coupa initiative.
I encourage you to register on the Coupa website to receive our latest news. And here’s a new email address you can reach me at: dave at coupa dot com. We’d love to hear from parties interested in engaging in our open source projects. In addition, we have a few openings for early adopter customers who can engage with us in an advisory role. Finally, we’d love to connect with SI’s specializing in either open source or Procurement.
I am planning to continue to operate Procurement Central as a separate blogging conversation from Coupa. It will afford me the opportunity to continue to recount my Oracle experiences, as well as touch upon the current trends I’m seeing in Procurement. And now I can add news on the start-up & also be able to share the technology and functionality choices we’re making.
Thanks to all of you who pushed me to get off the beach and do this. I’m grateful for your support and encouragement & hope Coupa will eventually live up to your high expectations!
Entry Filed under: General, Interviews, Technology, e-Sourcing Marketplace
June 15th, 2006
Todd Epple - Iasta
Yahoo Finance is a great site… and it has been since I started using it during the grand old days of 1997 (almost 10 years ago!). One of the things it lets you do is create watchlists of different investments you may own or just track. I know there are many flashy sites that exist now which let you do the same thing but Yahoo Finance “just works” and hey, it’s good enough for me.
Anyway, I found one of the stocks I track mysteriously missing data in the watchlist this week. It took a little bit of research to find out that it’s not really gone at this point but simply had its stock symbol changed. I’m not sure anyone would be surprised to learn the stock I am talking about is the famous VERT (now temporarily VERTD located at Yahoo here), who appears to be on the emergency room table with the doors closed.
It seems Verticalnet finally got its 1:7 reverse stock split effectuated this Monday morning in order to avoid the NASDAQ delisting which has been hanging over its head for more than a year since the dreaded initial delisting warning letter arrived last April 27th. At that time the stock was trading at a lofty 80 cents per share. Management started considering proposing the reverse split to the shareholders to stay off the OTCBB or Pink Sheets soon thereafter. Unfortunately, from that point until last Friday the shares dropped about 74% to 21 cents per share (or $1.47 split-adjusted) giving the stock precious little breathing room to stave off another delisting attempt. Even worse is that in the three trading days of this week it has dropped another 23% to $1.13 with some shares traded yesterday at $1.01 before rallying at the end of the day. The 3 month direction of vertical tells the whole story.
To be fair, it is a relatively thinly traded security and surely anything can happen but if this trend continues it will have a very short lived stay above the required $1.00 before receiving another dreaded letter.
Looking at the latest first quarter financial statements which Nate conceded represent a “low point from which we grow revenue” we find revenues of $3.9M (compared with $5.3M from the year before) giving a whopping net loss of $5.3M (compared to a net loss of $3.2M the year before). Indeed services revenue was down $1.4M for the quarter as the top two customers (representing 33% of total revenue in 1Q06 or 41% in 1Q05) drastically cut services.
These results were sufficient for Debbie Wilson to give VERTD the first “F” grade for financial performance awarded by her in the past three years.
Also not entirely surprising given the earlier post by David Bush regarding companies who no longer consider ISM to be a worthwhile endeavor…
Recently, a new debt investor has come to the table sinking $4M (netting VERTD $3.7M after costs) in subordinated debt and depending on whether consent is granted by this Friday by the senior debtholders who came to the table last August the annual rate will be either 6% (12% if no consent) with principal of $5.3M due in 18 months (January ‘07 if no consent!). I haven’t imputed the effective interest rate of this note but it’s safe to say it’s very healthy and I sincerely hope the senior debtholders provide that consent (I’m sure they already have).
There are a lot of other factoids which can be learned by reading the SEC filings or press releases (including this one issued yesterday which basically says that their clients are running more e-Sourcing events than ever but does not allude to a dime of additional revenues for these on-demand events. I’m sure every single e-Sourcing vendor can say exactly the same thing especially considering the unbelievably rapid growth rate the entire SaaS e-Sourcing industry is currently experiencing.
I could bore you all day with these gory details and I really think the few people I do know at VerticalNet are great people who are doing the best work they can given the circumstances. I do feel for them having to put a positive spin on these results as they make what must be extremely difficult decisions to cut costs drastically to be more inline with the actual revenues and the historical concentration of revenue in two accounts. They (like all vendors) are seeing increased software licensing and have signed some good agreements but unless the volume is turned up very quickly it may be too little too late. The status quo is not sustainable and I agree with Jason Busch that it won’t be long before the consolidation wolves are at the door salivating over the IP and customers.
Entry Filed under: General, Technology, e-Sourcing Marketplace
June 14th, 2006
David Bush - Iasta
In a recent article in Supply Chain Manufacturing & Logistics Magazine, we are told that “with a fundamental power shift to retailers, CPG manufacturers slash product bloat, hone global supply chains, and build up their brands” because of “increased retailer power” in today’s market. This very insightful article that talks about brand, RFID, product lines, M&A, demand management, the information last mile, increased retailer power, and how the typical eight percent out-of-stock rate is no longer tolerable and demonstrates that when the going gets tough, the tough must get going.
With the overwhelming shift to off-shore manufacturing, supply chains have become more complicated due to the corresponding increases in product life cycles, customer service pressures, and compliance issues. The heightened competition and consequent price pressures are driving CPG manufacturers to form tighter partnerships with retail customers, who see themselves as providing showroom shelf space for the manufacturer’s goods, respond innovatively in gauging demand, protect and strengthen the brand, decrease inventory costs, and increase flow-through from factory to shelf.
Brands have become a manufacturer’s only means of leverage in many cases, driving many manufacturers to become retail partners to increase that leverage.
RFID is becoming strategic, with a value proposition of faster payment cycles, better inventory control, and a way to get closer to the end customer via programs such as Wal-Mart’s RFID data feedback.
Core competencies are becoming crucial, as you just can’t compete with China on commodities these days. With the recent introduction of rigorous labeling requirements, it’s difficult for a CPG manufacturer to stretch itself across too many product lines. And with the recent surge in oil prices, manufacturers need to find any excuse possible to eliminate products that require petroleum-based packaging. Furthermore, with customers often willing to pay more for brand, it is often easier to raise margins on core products then try to increase revenues on a range of commodity-like products.
Inventory productivity is becoming critical to protect margins under pressure. This requires an advanced approach to the planning process, which must be synchronized with the supply chain on a just in time (JIT) basis, and optimization of distribution networks.
Demand management is also crucial because the typical eight percent out-of-stock rate is no longer tolerable, especially if the competitor around the corner has the product in stock. This requires maintaining extra inventory if you are using an overseas supplier or lining up back-up onshore manufacturers as insurance against stock-outs.
In all, the landscape has shifted significantly for CPG manufacturers and they have to change their approach, as well as their practices, in order to maintain competitiveness in today’s marketplace.
However, one thing the article did not really dig into was what type of processes the manufacturer could latch onto to improve their operations. Presumably the author was thinking Six Sigma, which is good, but I think there’s an easier message that could be conveyed. Simply put, focus on value.
CPG manufacturers are focusing on brands because it adds perceived value in the eyes of the customer. They are focusing on RFID efforts because it adds value to the retailers. Core competencies add value to their operations by lowering costs, increasing revenues, and improving margins - which is all good for the bottom line. And demand management and inventory productivity reduce inventory cost, which has obvious value as well.
And what does this have to do with sourcing? Once you’ve latched onto value, Total Value Management just makes sense as it echoes your corporate philosophy and Total Value Management sourcing processes further improve your operations by allowing you to produce higher quality core products better, faster, and cheaper, improving the brand and your bottom line at the same time.
Entry Filed under: General, Global Supply Issues/Risk, Suppliers
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